Budgeting is a life hack thats beneficial for everybody. But it is especially important if you’re trying to track your money and monitor your spending habits in today’s Nigeria. When done right, it can be a great way to control your finances and put your business on the path to profitability. But do you know all you need to know about budgets? Do you know the types of budgets?
The main types of budgets are personal, corporate (or business) and government. There are also balanced, deficit, surplus, sale, production, capital, master, static, flexible, revenue, expenditure, operating, labour and marketing budgets.
You can apply these budgets to various scenarios — depending on the budgeting period and factors like income (or revenue). In this article, we’ll review each budget type and dive into the budgeting methods. But first, what’s a budget?
What is a budget?
A budget is a plan — usually written — highlighting an estimation for a certain period. In its simplest form, this plan is typically financial and features a calculation (or tabulation) of your income (how much you earn) and expenditure (how you spend your money) for a particular period (for example, a month).
Applied to businesses and governments, budgets can also have cash flow, revenue, sales volume, business expenses, debt, profit and variable costs. Some budgets even include assets, liabilities and other non-financial components like environmental impacts from manufacturing processes.
It all boils down to the type of budget in question and its purpose.
What is the purpose of a budget?
A budget’s purpose is simple. It helps you to take control of your money. In other words, it allows you to plan every step of your finances and directly measure the impact of each financial decision.
With a budget, you can account for how much you make, track how you spend every penny (or kobo) and make the most of all your money.
This purpose also applies to non-personal and non-financial budgets. Budgets help businesses, organisations and governments to account for and meticulously allocate resources to various activities.
Still, every type of budget has a specific purpose (beyond the general functions above), and we’ll discuss them when we explore the 22 types of budgets you need to know.
For now, let’s dive into what makes up a budget.
What are the components of a budget?
Like most financial tools, you can break down budgets into separate elements. These elements are simple concepts that add up to make a budget the practical planner we know and love. What are these elements?
The essential components of a budget are as follows:
- Cash flow. Cash flow represents the actual movement of money in and out of your account. It tracks how money enters (income) and exits (expenses) over a specific period. It’s the most common way to assess your liquidity and financial health.
- Estimated income or revenue. This component outlines your expected earnings or revenue sources, including salary, sales or investments. It includes all the money you anticipate receiving during the budgeting period and provides the foundation for your budget’s income projections.
- Fixed cost. Fixed costs are regular, predictable expenses that remain constant over time. They include rent, insurance premiums, and long-term loan repayments.
- One-off expenses. These are irregular or occasional financial forays, like a medical bill or a home repair. Budgeting for these ensures you’re prepared for unexpected financial events.
- Profit. This component is often associated with business budgets and represents the positive difference between a company’s revenue and expenses. It’s a great way to evaluate financial performance and helps businesses determine whether they’re making more than they spend.
- Variable cost. These costs vary from period to period, usually according to your activity level or consumption. They include groceries, utility bills, entertainment subscriptions and personal care expenses.
These components collectively form the foundation of a budget — enabling individuals, businesses and governments to manage their finances effectively and achieve their financial goals.
What are the types of budgets?
Now that we’ve explored the inner workings of a budget, we can jump over to the types of budgets in existence.
The 22 types of budgets are:
- Personal budget. This type of budget is a financial plan created by individuals or households to manage income and expenses. Its primary function is to help people (and households) achieve their financial goals and track their spending habits.
- Corporate or Business budget. Companies develop corporate budgets to allocate resources and estimate revenues and expenses. These budgets also guide financial decision-making.
- Government budget. This type of budget outlines how public funds will be allocated to various programs and services, and is aimed at addressing the needs of a country’s citizens while maintaining fiscal responsibility.
- Balanced budget. This involves projected revenues (or income) equalling projected expenses — resulting in a net financial balance of zero. It typically signifies financial stability.
- Deficit budget. Businesses create deficit budgets when projected expenses exceed projected revenues, leading to a negative financial balance that may require borrowing or alternative funding sources.
- Surplus budget. A surplus budget is one where projected revenues (or income) exceed projected expenses — resulting in a positive financial balance. Businesses usually save surpluses or use them for specific purposes.
- Sales budget. This budget provides a forecast of a business’ anticipated sales revenue for a set period (for example, a year). It provides insights into sales targets and performance, helping companies to make better decisions.
- Production budget. This budget outlines the quantity of goods a company plans to manufacture within a given timeframe. It guides manufacturing volume and sets the stage for resource allocation.
- Capital budget. These budgets can apply to individuals and businesses but focus on long-term investments in assets like equipment, art and property. They help assess the financial feasibility of such investments.
- Cash flow or cash budget. This budget is simple and tracks the actual inflow and outflow of cash, ensuring sufficient liquidity to meet various financial obligations.
- Conditional budget. Conditional budgets depend on specific conditions or events and are often used in project planning or risk management. For example, you could create a conditional budget for increased cement prices if you’re building a house.
- Marketing budget. This allocates resources for marketing activities — including advertising, promotions and market research. It helps to support sales and brand growth.
- Project budget. A project budget outlines a specific project’s estimated costs and funding requirements. It’s a core tool in project management and enables efficient resource allocation.
- Revenue budget. This budget details the expected income or revenue streams for a particular period. Organisations and individuals can use it to plan their financial activities.
- Expenditure budget. Expenditure budgets list the expected costs and expenses for a specific period. They are usually used for cost control and financial planning.
- Appropriation budget. These budgets are typical in government settings and used for allocating funds to specific agencies or programs based on legislative decisions.
- Performance budget. These are similar to conditional budgets but link financial resources to achieving specific goals. In other words, staffers get more money when they directly contribute to a particular business outcome.
- Operating budget. An operating budget covers day-to-day expenses like salaries, utilities and supplies — enabling organisations to manage routine operations effectively. You can also use them as an individual to track and control your spending habits.
- Master budget. A master budget is a combination of all other budgets in a business. Entrepreneurs and managers use it to provide a financial plan that guides strategic decision-making.
- Static budget. These budgets outline fixed income and expense figures without accounting for changes in activity levels or external factors.
- Flexible budget. Flexible budgets adjust income and expense projections based on changes in activity levels — usually market forces or exchange rates. These budgets are adaptable and super accurate but may be hard to track.
- Labour budget. Businesses use labour budgets to estimate and manage labour costs. They include components like salaries, wages and bonuses and help ensure maximum employee utilisation.
Some of these budgets might seem familiar; others might not. However, they all have practical uses and are essential to making sound financial, economic or business decisions.
What are the budgeting methods?
Budgeting is a core part of financial literacy. It refers to the process of creating a spending plan — or budget — to efficiently use your resources. There are various approaches to developing a budget, and we’ll discuss all of them in this section.
Below are the budgeting methods:
- Activity-based budgeting. This budgeting method allocates resources based on the expected activities and costs associated with each activity. It helps organisations and individuals prioritise spending where it will have the most impact.
- Envelope budgeting. Envelope budgeting involves allocating specific amounts of money to envelopes, groups or categories for different expenses. It helps promote disciplined spending by limiting expenses within each category.
- Imposed budgeting. Imposed budgeting occurs when a higher authority — such as senior management — sets a budget for lower-level departments or individuals. This budgeting method provides little room for input or flexibility and is typical of large businesses.
- Incremental budgeting. This budgeting adjusts a previous budget by adding or subtracting a certain percentage or fixed amount. These adjustments are usually based on past performance, new information or market prices.
- Negotiated budgeting. In negotiated budgeting, stakeholders collaborate to set budget targets. They do this by considering input from various departments or individuals to achieve consensus on financial goals.
- Participative budgeting. This budgeting method actively involves employees or team members in the budgeting process. It encourages their active participation and requires their input in setting financial targets.
- Rolling budgeting. This method maintains a continuous budget cycle, regularly updating and extending the budget horizon. Companies using this budgeting method typically add a new period when the previous one expires.
- Value proposition budgeting. This budgeting method focuses on aligning budget allocations with the perceived value of goods or services. This way, businesses can ensure they allocate resources to areas that will generate the most value.
- Zero-based budgeting. This method starts from scratch. It requires one to justify every expense for each budgeting period. It encourages a critical assessment of all revenue and expenditures. Individuals and businesses can deploy this method.
You might encounter other budgeting methods in the wild, but they’re likely modifications of the approaches we’ve shared here.
Budgets are simple tools, but they can be powerful financial weapons if you apply them well — whether you own a business or not.
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- Cowrywise: 20 Types of Budget
- HDFC Bank: What Are The Three Types Of Budgets
- FutureLearn: 7 different approaches to budgeting
- LinkedIn: 5 Budgeting Methods Everyone Should Know About- advantages and drawbacks
- Zoho Books: Business Budget: What is it & Why is it important?
- Indeed: Understanding the Types of Budgets in Accounting
- Investopedia: What Is a Budget? Plus 10 Budgeting Myths Holding You Back